Monetary policy through the risk-taking channel: Evidence from an emerging market

Abstract

This paper examines the influence of domestic and international monetary policies on the risk-taking behavior of Brazilian banks from 2003 to 2021. Using a dynamic panel model and macroeconomic data, we find a negative correlation between interest rates and banks' risk-taking. Lower interest rates heighten risk activities, evidenced by expanded credit, interbank deposits, risk exposure, provisions, and leverage. The relationship is stronger with international rates, highlighting global monetary policy's significant role. Our analysis also distinguishes the impacts of the subprime and Covid-19 crises, showing how these events, along with bank-specific characteristics and macroeconomic conditions, affect risk-taking. This study provides nuanced insights into the interplay between monetary policy, financial crises, and bank-specific factors in an emerging market context.